SECURITIES LAW IN THE ROBERTS COURT AGENDA OR …€¦ · Securities Law in the Roberts Court: ......

EMPIRICAL LEGAL STUDIES CENTER

WORKING PAPER NO. 10-026

SECURITIES LAW IN THE ROBERTS COURT: AGENDA OR INDIFFERENCE?

A. C. PRITCHARD

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Electronic copy available at: http://ssrn.com/abstract=1691683

Securities Law in the Roberts Court: Agenda or Indifference?

A.C. Pritchard

Draft #6 October 2010

Abstract: Historically, securities law has not been a high priority for the Supreme Court. The first five years of the Roberts Court, however, suggest an upsurge of interest in the federal securities laws, with nine cases decided, a significant increase from the Rehnquist Court’s average. These numbers are deceptive. Analysis of the opinions deciding these cases – and more importantly, the issues debated by the justices – suggests that the Court is not interested in the substance of the securities laws or the policies that animate them. Instead, securities law serves as a backdrop for debates over statutory interpretation and the relationship of the judiciary to the administrative state. Only in the area of securities class actions is there any engagement with the specific subject matter. Notwithstanding charges that the Roberts Court is “pro business”, the Court has not charted a consistent course favoring corporate defendants. Instead, the Court has demonstrated a bias toward the status quo, resisting attempts to both expand – and restrict – the reach of Rule 10b‐5 class actions. This article explores the implications of the Roberts Court’s indifference to securities regulation and securities markets for the making of securities law.

Frances and George Skestos Professor of Law, University of Michigan. This paper was prepared for the Business Law in the Roberts Court Conference held at the Case Western Reserve University School of Law sponsored by the Searle Freedom Trust. Thanks to participants at that conference for helpful comments, as well as Luis Delatorre. Please send comments to [email protected].


I. Introduction

To outsiders, securities law is not all that interesting. The body of the law is made up of

an interconnecting web of statutes and regulations that fit together in ways that are decidedly

counter‐intuitive. Securities law rivals tax law in its reputation for complexity and dreariness.

Worse yet, the subject regulated – the capital markets – can be mystifying to those uninitiated

in modern finance theory. Moreover, those markets are rapidly evolving and increasing in their

complexity. If you do not understand how the financial markets work, it is hard to understand

how securities law affects those markets.

Nothing in the biographies of the current members of the Supreme Court suggest they

are likely to be either interested, or well equipped, to deal with the federal securities laws. This

lacunae of securities expertise is a relatively recent phenomenon. For most of the first fifty

years after the federal securities laws were adopted, the Court had at least one justice with a

background in the securities laws, either as a regulator – William O. Douglas1 or as a

practitioner – Lewis F. Powell, Jr.2

Powell’s retirement left the Rehnquist Court with a void in this regard for most of its

tenure, and his departure marked a significant decline in the Court’s securities caseload, as

demonstrated by Table 1 below. Usually the justices’ collective lack of familiarity with the

securities laws means that few petitions for certiorari are granted in securities cases; the Court

simply does not decide that many cases in the field. As Table 1 below demonstrates, the

1 A caveat is in order here; despite Douglas’s background as SEC Chairman, he exhibited little interest in the securities laws during his time on the Court. See A.C. Pritchard & Robert P. Thompson, Securities Law and the New Deal Justices, 95 Va. L. Rev. 841 (2009). 2 On Powell’s influence on the Court’s securities law jurisprudence, see A.C. Pritchard, Justice Lewis F. Powell, Jr. and the Counter‐Revolution in the Federal Securities Laws, 52 Duke L.J. 841 (2003).


Securities Law in the Roberts Court

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Rehnquist Court averaged slightly more than one case per term during its nearly twenty year

run, a figure consistent with the average number heard by the Warren Court.

Supreme Court Securities Cases, 1936‐2010

Court Securities Cases

Average Per Term

Total Cases Securities Percent

New Deal (1936‐1954)

21 1.11 2,894 0.7%

Warren (1954‐1969)

17 1.06 3,491 0.5%

Burger (1969‐1986)

49 2.72 3,828 1.3%

Rehnquist (1986‐2005)

20 1.00 2,173 0.9%

Roberts (2005‐ 2010)

9 1.80 388 2.3%

Total 116 1.55 12,564 0.9%

The first five years of the Roberts Court have departed from that long‐term pattern, at least in

terms of securities case load. The Roberts Court has decided a whopping nine cases in the field

of securities law, 2.3% of its docket. That increase suggests the justices have taken a new

interest in the field, despite the lack of a justice with a background in securities law.

Does this upsurge in securities cases reflect a new agenda for the Supreme Court in the

field of securities law? A closer examination of the cases suggests that the numbers may be

deceptive. As Table 2 demonstrates, no single justice has stepped forward to take charge of the

field of securities regulation as Powell did during his time on the Burger Court. Only Justice

Breyer has written more than one majority opinion in the area. Justice Stevens appears to be

engaged with the field, but most of his seven opinions in the field have been dissents or

concurrences; his interest does not translate into influence, as it did for Powell.


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Roberts Court Securities Cases, 2005‐2010

Decision Majority

Dissent Concur

Merrill Lynch v. Dabit Stevens

Kircher v. Putnam Funds Trust Souter Scalia

Credit Suisse Securities v. Billing Breyer Thomas Stevens

Tellabs v. Makor Issues & Rights Ginsburg Stevens Scalia, Alito

Stoneridge Inv. Part. v. Scientific‐Atlanta Kennedy Stevens, Souter, Ginsburg

Jones v. Harris Associates Alito Thomas

Merck & Co. v. Reynolds Breyer Stevens, Scalia, Thomas

Morrison v. National Australia Bank Scalia Stevens Breyer, Stevens, Ginsburg

Free Enterprise Fund v. PCAOB Roberts Breyer, Stevens, Ginsburg, Sotomayor

Opinion authors in bold.

When one turns to the substance of the opinions written in these cases, one finds little

effort to grapple with the relation between the financial markets and the securities laws. There

are vigorous debates among the justices in some of these cases, but they revolve around

questions of statutory interpretation and the relationship between the judiciary and the

administrative state. The overall theme might be characterized as one of judicial modesty.

One exception to this pattern of judicial modesty, would appear to be the topic of

securities class actions. The passage of the Private Securities Litigation Reform Act in 1995

(PSLRA),3 and its follow‐on, the Securities Litigation Uniform Standards Act in 1998 (SLUSA),4

3 Pub. L. No. 104‐67, 109 Stat. 737 (1995) (codified as amended in scattered sections of 15 U.S.C.). 4 Pub. L. No. 105‐353, 112 Stat. 3227 (1998).


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have generated a number of interpretive opportunities for the Roberts Court. Most of these

cases have revolved around straightforward issues of statutory interpretation, but on occasion

the issues raised by these statutes have forced the justices to grapple with the policy

implications of their decisions for securities class action practice. Those decisions have caused

critics to label the Roberts Court as “pro business.”5 Does the “pro business” Roberts Court

have a negative attitude toward securities class actions? An examination of the overall pattern

of the Court’s decisions in this area suggests a bias toward the status quo, resisting attempts to

both expand – and restrict – the reach of Rule 10b‐5 class actions.

I proceed as follows. The justices’ debates over the appropriate method of interpreting

statutes are analyzed In Part 2. Part 3 looks at the perspective on the administrative state

offered in the Roberts Court’s securities decisions. Part 4 assesses whether the Roberts Court

has taken a hostile attitude toward securities class actions. Part 5 concludes.

5 See, e.g., New York Times, First Monday (Oct. 3, 2010) (“The Roberts court has championed corporations.”).


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II. Statutory Interpretation and Legislative Intent

Three of the securities cases decided during Chief Justice Roberts’s tenure have turned

exclusively on questions of statutory interpretation. More precisely, these cases have turned

on the Court’s assumptions about what Congress intended when it used specific statutory

language. That language was adopted against a backdrop of judicial interpretations of similar

language; the opinions purport to erect a predictable framework of interpretation. These

opinions betray no indication that the Roberts Court is attempting to push the securities laws in

a particular direction. The lack of an agenda in the opinions is reinforced by another common

thread; the petitions for certiorari were granted by the Court only after a clear conflict had

arose in the circuits over the particular question of statutory interpretation involved in each

case. These cases are decided because the justices felt obligated to resolve the split, not

because any member of the Court had a particular interest in the securities topic presented.

A. SLUSA

Chief Justice Roberts’ first term brought two securities cases to the Court’s docket, both

involving interpretive issues arising out of SLUSA. A brief introduction to SLUSA is necessary to

understand the issues in these cases. Congress adopted SLUSA in 1998, three years after

enacting the PSLRA. The PSLRA made it more difficult to allege securities fraud by: (1) adopting

a more stringent pleading standard, including heightened requirements for pleading scienter,

i.e., state of mind;6 and (2) creating an automatic stay of discovery.7 Those restrictions under

federal law gave rise to an exodus of securities class actions to state court; state “blue sky” anti‐

6 Exchange Act § 21D (b) (1); 15 U.S.C. §78‐u4(b)(1). 7 Id. at § 21D (b) (3) (B).


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fraud provisions generally lack the procedural protections that the PSLRA affords defendants in

the federal securities class actions.8 The goal of SLUSA was to preempt state law securities

cases thereby pushing plaintiffs back to federal court where the restrictions of the PSLRA would

apply.9

Congress did not, however, preempt the substantive law of state securities fraud or its

remedies. Instead, it preempted a certain procedure employed by state courts in adjudicating

securities fraud cases: class actions.10 In targeting only securities fraud class actions, Congress

left state law to provide a cause of action for securities fraud, albeit one that can only be

pursued individually. SLUSA preempts class actions:

based upon the statutory or common law of a State or subdivision thereof . . . by any private party alleging –

(A) a misrepresentation or omission of a material fact in connection with the purchase or sale of a covered security; or (B) that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.

Although the language is not identical, SLUSA’s preemption language tracks closely the general

federal anti‐fraud prohibition found in §10(b) of the Exchange Act and the SEC’s Rule 10b‐5,

Rule 10b‐5 is the typical basis for federal securities class actions.11

1. Merrill Lynch, Pierce, Fenner & Smith v. Dabit

Merrill Lynch, Pierce, Fenner & Smith v. Dabit12 raised the question of the scope of

SLUSA’s preemption. The case arose out of the securities analyst scandals of the early 2000s, in

8 See generally David M. Levine & A.C. Pritchard, The Securities Litigation Uniform Standards Act of 1998: The Sun Sets on California’s Blue Sky Laws, 54 Bus. Law. 1 (1998). 9 See Joint Explanatory Statement, H.R. Rep. 105‐803 (Oct. 9, 1998) (“The purpose of this title is to prevent plaintiffs from seeking to evade the protections that Federal law provides against abusive litigation by filing suit in State, rather than in Federal, court.”). 10 Securities Act § 16(f)(2)(A); 15 U.S.C. § 77p(f)(2)(A)) 11 17 C.F.R. § 240.10b‐5.


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which the New York attorney general and the SEC alleged that securities analysis provided by

the major investment banks was biased as a result of those banks’ conflict of interest.

Essentially, the government alleged that the banks were hyping the common stock of their

investment banking clients in order to garner more investment banking business. The

government enforcement actions were followed by a host of private claims, which were

asserted in both federal securities class actions and arbitration proceedings. The scandal also

gave rise to the claim in Dabit: plaintiffs alleged that they were induced to hold securities that

they would have sold if the analyst research that they relied upon had been accurate.13

Plaintiffs’ complaint was a transparent attempt to evade SLUSA’s restrictions, but it gave

rise to an interpretive difficulty. SLUSA preempts only claims that are “in connection with the

purchase or sale of a covered security;” plaintiffs were claiming that they had not sold their

securities. Moreover, the claim being asserted could not have been raised under federal law.

In Blue Chip Stamps v. Manor Drug Stores the Supreme Court held that plaintiffs must have sold

or purchased securities in order to have standing under Rule 10b‐5.14 Would Blue Chip’s

narrow interpretation of “in connection with the purchase or sale of a security” undercut the

preemptive force of SLUSA?

Ultimately, Justice Stevens, writing for the Court was forced to engage in judicial

“reimagination” of Congress’s intent. No one seriously doubted that Congress, if it had

considered the question, would have preempted such claims: the point of SLUSA was to protect

issuers from meritless suits by funneling securities class actions into federal court. In addition,

12 547 U.S. 71 (2006). 13 Dabit, 547 U.S. at 75. 14 421 U.S. 723 (1975).


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the economic logic of holder claims is dubious at best. Allowing compensation for holder claims

would amount to a windfall – I would have sold if I had known the truth! (And the purchaser

would not have known?) Presumably Congress did not anticipate the problem of holder suits

because of the scant likelihood that any state court would allow such claims. The Court notes

that Congress had no occasion to consider whether holder claims should be preempted at the

time it adopted SLUSA: “the actual assertion of such claims by way of class action was virtually

unheard of before SLUSA was enacted.”15 Notwithstanding the novelty of such claims, it was

clear to the Court that “[a] narrow reading of the statute would undercut the effectiveness of

the 1995 Reform Act and thus run counter to SLUSA’s stated purpose, viz.., ‘to prevent certain

State private securities class action lawsuits alleging fraud from being used to frustrate the

objectives of the [PSLRA].’”16

Fortunately for the Court, it was able to rely on prior interpretations of Rule 10b‐5 that

had also loosened the requirement of a purchase or sale. The Court had previously interpreted

Rule 10b‐5 to not require the allegation of a specific purchase or sale of a security – at least in a

government enforcement action. According to the Court, “[u]nder our precedents, it enough

that the fraud alleged ‘coincide’ with a securities transaction – whether by the plaintiff or

someone else.”17 Thus, the Court had two interpretations of Rule 10b‐5 that it could look to in

interpreting the essentially identical language used by Congress in SLUSA: the first, the

construction of the private right of action, and the second, purporting to construe only § 10(b)’s

text, which applied only to government actions. At first glance, one might have thought the

15 Dabit, 547 U.S. at 88. 16 Dabit, 547 U.S. at 86 (quoting SLUSA § 2(5), 112 Stat. 3227). 17 Dabit, 547 U.S. at 85 (citing United States v. O’Hagan, 521 U.S. 642, 651 (1997)


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interpretation used for the private right of action was the most applicable; the Court was, after

all, addressing a private right of action, albeit one arising under state law. The Court, however,

chose the broader interpretation of §10(b) in defining SLUSA’s scope, it offered two reasons in

support of that interpretive choice.

Both justifications are open to criticism. The first offered was that the broader position

was consistent with the SEC’s longstanding interpretation.18 Of course, the SEC’s interpretation

arose out of government actions, so it is hard to see why it should guide the interpretive choice

being made here. Second, the Court conjectured that “Congress can hardly have been unaware

of the broad construction adopted by both this Court and the SEC when it imported the key

phrase—‘in connection with the purchase or sale’ into SLUSA’s core provision.”19 This

conjecture is open to question – it seems to posit an ideal legislator who pays careful attention

to judicial interpretations – but more importantly, it does not answer the question of which

interpretation Congress is presumed to be aware of. Why not both? And why presume that

Congress favored one over the other? With two interpretations available, Stevens chose the

one consistent with the statute’s obvious purpose. The inclusion of that purpose in the text of

the statute meant there would be no debates over how to read legislative intent, a topic that

would arise in later cases; that intent was included in the statute enacted by Congress and

signed into law by the President. As a result, Stevens was able to attract a unanimous Court for

his opinion.20

2. Kircher v. Putnam Funds Trust

18 Dabit, 547 U.S. at 85. 19 Dabit, 547 U.S. at 85. 20 Justice Alito did not participate, having joined the Court after oral argument.


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The Court’s second foray into SLUSA was almost unanimous, with only Justice Scalia

declining to join the majority opinion. Kircher v. Putnam Funds Trust called on the Court to

interpret SLUSA’s removal provision.21 SLUSA bolsters its preemptive effect with the option of

removal to federal court.22 The provision is somewhat unusual in that is allows for removal of

actions so that they can be dismissed in federal court. Ordinarily, one would expect the law to

require the defendant to bring its motion to dismiss or demurrer in state court. Indeed, SLUSA

appears to strip the state court of subject matter jurisdiction; ordinarily, the state court would

dismiss the case, even on its own motion.

The removal provision, however, serves two important federal interests: (1) it allows

federal courts to interpret the scope of preemption, thus enhancing uniformity; and (2) it

triggers the PSLRA’s stay of discovery. SLUSA contains a number of exceptions to its

preemptive reach, so there is some federal interest in uniformity of interpretation. The more

pressing interest for defendants, however, is the ability to block discovery. Some state court

rules would allow discovery while a motion to dismiss was pending, thus forcing the defendant

to seek a discretionary stay from the state court or an injunction against discovery from a

federal court under SLUSA.23 That discovery could be used, not only in the state court action,

but also in a subsequent federal class action. Removal allows the defendant to file a motion to

dismiss in federal court which automatically triggers the federal discovery stay under the

PSLRA. Thus, removal to federal court allows Congress to protect issuers against the costs of

21 547 U.S. 633 (2006). 22 Securities Act § 16(c); 15 U.S.C. § 77p(c)) (“Any class action brought in any State court involving a covered security, as set forth in subsection (b), shall be removable to the Federal district court for the district in which the action is pending, and shall be subject to subsection (b).”). 23 The injunction against discovery may or may not be available, depending on whether a parallel action has been filed in federal court.


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“fishing expedition” discovery without further interfering with state courts by limiting the

availability of discovery there.

This removal provision, however, raises the question of the appropriate response to

improperly removed cases, i.e., a case not within the scope of SLUSA’s preemption. If a non‐

preempted action has been removed erroneously to federal court, SLUSA allows the federal

court to remand the action to state court.24 In Kircher, the district court remanded the case to

state court after determining that federal jurisdiction was lacking.25 Defendants appealed to

the Seventh Circuit, which held that the claims were precluded by SLUSA.26

To reach that conclusion, however, the Seventh Circuit first had to determine that it had

jurisdiction to hear the appeal. This question was complicated by 28 U.S.C. § 1447(d), which

bars appellate review of district court orders remanding for lack of subject matter jurisdiction.

The Seventh Circuit held the question of preclusion to be distinct from the question of

jurisdiction, and therefore reviewable on appeal.27

The Supreme Court disagreed, noting that the Court had “relentlessly repeated” that

remand orders are not subject to appellate review.28 That consistent approach meant

“Congress is aware of the universality of th[e] practice of denying appellate review of remand

orders when Congress creates a new ground for removal.”29 The Court found no “clear

24 Securities Act § 16(d)(4); 15 U.S.C. § 77p(d)(4)) 25 The district court’s decision which was based on the fact that plaintiff had not purchased or sold securities, preceded the Court’s Dabit decision rejecting that interpretation of SLUSA’s preemptive language. Kircher, 547 U.S. at 638 n. 5. 26 403 F.3d 478 (2005). 27 373 F.3d 847 (2004). 28 Kircher, 547 U.S. at 640‐641 & n. 8 29 Kircher, 547 U.S. at 640‐641 & n. 8


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statutory command” in SLUSA to overcome that presumption.30 The Court read the statute’s

removal provision to be coextensive with its preclusion provision: “Once removal jurisdiction

under subsection (c) is understood to be restrict to precluded actions defined by subsection (b),

a motion to remand claiming the action is not precluded must be seen as posing a jurisdictional

issue.”31 If not precluded, then no jurisdiction. Consequently, the district court’s remand order

was not subject to review in the court of appeals. Moreover, federal courts were not given

exclusive authority to address the question of preclusion; the Court read the statute as allowing

the defendant to seek dismissal in state court without first removing to federal court.32 Few

defendants will opt to do this, but it does mean that the state court will have jurisdiction to

dismiss a preempted claim.

The only aspect of the case that generated any dispute among the justices was the

question of what was needed to trigger the rule of no appellate review. Justice Scalia wrote a

concurrence to offer his view that it did not matter whether the remand was based on lack of

jurisdiction or not.33 As long as the district court stated that the remand was based on lack of

jurisdiction, that was sufficient to invoke the rule of no appellate review.34 The interpretation

of SLUSA was unimportant for Scalia; what mattered in the case was the enforcement of the

rule of no appellate review for remand orders.

The justices were in unanimous agreement that there is nothing special – nothing

inherently federal – about SLUSA. It is a federal law, preempting certain state court actions, but

30 Kircher, 547 U.S. at 641 n. 8. 31 Kircher, 547 U.S. at 643‐644. 32 Kircher, 547 U.S. at 646 33 Kircher, 547 U.S. at 648. 34 Kircher, 547 U.S. at 649‐650.


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it can be applied by either federal or state courts, at the defendant’s option. The ordinary rules

of appellate (non)review are deemed to apply. No one on the Court saw any value in having

federal courts as the exclusive interpreters of SLUSA’s reach, and no one mentioned the need

to enforce the discovery stay as a justification for keeping the case in the federal courts until

the question of preemption was resolved. The Court was focused on its jurisprudence relating

to remand orders, not the task of implementing SLUSA to craft a coherent federal securities

class action regime.

B. Statute of Limitations

The statute of limitations in Rule 10b‐5 cases has a somewhat convoluted history. Given

that the Rule 10b‐5 cause of action was created by the judiciary, rather than Congress, it is

hardly surprising that Congress did not specify a limitations period for § 10(b) when it passed

the Exchange Act in 1934. When confronted with the issue, the Court borrowed the Exchange

Act provision applicable to securities price manipulation claims,35 which requires that suits be

brought “within one year after the discovery of the facts constituting the violation and within

three years after such violation.”36 Congress claimed the issue for itself, however, when it

passed the Sarbanes‐Oxley Act in 2002 in the wake of the Enron and WorldCom scandals.37

That law extended the limitations period for §10(b) actions to “2 years after the discovery of

the facts constituting the violation” or “5 years after such violation.”

35 Lampf, Pleva, Lipkind, Prupis & Pettigrow v. Gilbertson, 501 U.S. 350 (1991). 36 15 U.S.C. § 78i((e) 37 Sarbanes‐Oxley Act § 804, 116 Stat. 801 (2002), codified at 28 U.S.C. § 1658(b).


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Merck & Co. Inc. v. Reynolds called on the Roberts Court to interpret both “discovery”

and “facts constituting the violation” as used in this provision.38 On the first point, the Court

had to resolve the uncertainty over whether discovery required actual discovery of the facts by

the plaintiff, or whether it should extend to facts that a “reasonably diligent plaintiff would

have discovered.”39 On its face, this would not seem to be much of an issue, as the parties

(along with the Solicitor General) agreed that the latter interpretation was correct.40 Justice

Breyer, however, addressed the issue at length, purportedly “because we cannot answer the

question presented without considering whether the parties are right about this matter.” The

more likely explanation, however, is that Justice Scalia (joined by Justice Thomas) disagreed on

this point. Scalia wrote separately to argue that discovery meant discovery by the actual

plaintiff in the case.41

The justices disagreed on the meaning of discovery because of their differing

approaches to statutory interpretation. For Breyer and the majority, the reasonably diligent

discovery standard made sense because lower courts had followed that approach prior to the

passage of the Sarbanes‐Oxley Act.42 “We normally assume that, when Congress enacts

statutes, it is aware of relevant judicial precedent.” 43 The Court concluded that Congress had

codified that precedent.

Scalia rejected the majority’s approach:

Even assuming that Congress intended to incorporate the Circuits' views – which requires the further unrealistic assumption that a majority of each House knew

38 130 S. Ct. 1784. 39 Merck, 130 S. Ct. at 1793. 40 Merck, 130 S. Ct. at 1793. 41 Merck, 130 S. Ct. at 1800 (Scalia, J., concurring) . 42 Merck, 130 S. Ct. at 1795. 43 Merck, 130 S. Ct. at 1795.


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of and agreed with the Courts of Appeals' opinions – that would be entirely irrelevant. Congress's collective intent (if such a thing even exists) cannot trump the text it enacts, and in any event we have no reliable way to ascertain that intent apart from reading the text. 44

Scalia’s preferred approach: locate the statute of limitations adopted by Congress in the overall

statutory scheme. Included in this scheme, in Scalia’s view, were not only the other provisions

of the Exchange Act, but also the Securities Act. Bringing the Securities Act into the picture

changes the analysis because that law includes an explicit constructive discovery provision in §

13. The limitations period begins to run “after the discovery of the untrue statement or the

omission, or after such discovery should have been made by the exercise of reasonable

diligence.”45 For Scalia, Congress’s inclusion of a constructive discovery provision in the

Securities Act’s statute of limitations meant that its omission in the analogous provision of the

Exchange Act must be given legal effect, i.e., constructive discovery would not trigger the

statute of limitations period under the Exchange Act.46

One might label Breyer’s approach to statutory interpretation “judicial centric” and

Scalia’s “textual centric.” Breyer’s approach can be criticized for making heroic assumptions

about the average legislator’s familiarity with the judicial precedents in a given area. If the goal

is to further legislative intent, Breyer’s postulated intent seems largely fictional. Moreover,

Breyer does not consistently take the approach throughout the opinion. Confronted with the

question of whether “inquiry notice” suffices to begin the running of the statute of limitations,

Breyer downplays the importance of lower court decisions adopting that standard because

44 Merck, 130 S. Ct. at 1802 (Scalia, J., concurring) . 45 15 U.S.C. § 77m. 46 Merck, 130 S. Ct. at 1800 (Scalia, J., concurring) (“To interpret § 1658(b)(1) as imposing a constructive‐discovery standard, one must therefore assume, contrary to common sense, that the same word means two very different things in the same statutory context of limitations periods for securities‐fraud actions under the 1933 and 1934 Acts.”).


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“[w]e cannot reconcile it with the statute, which simply provides that ‘discovery’ is the event

that triggers the 2‐year limitations period—for all plaintiffs.”47 Now he’s a textualist?

Sometimes the text controls, sometimes prior judicial interpretation controls. Breyer leaves us

to guess when to apply which standard.

Scalia candidly concedes that he is uninterested in legislative intent, only in legislative

enactments. His textual approach can be criticized for being unrealistic in its assumptions

about the competence of legislators to fit together statutory provisions into a coherent whole.

The problem becomes more acute when, as is the case with the securities laws, provisions are

adopted by different Congresses. In this case, the statute of limitations adopted as part of the

Sarbanes‐Oxley Act came almost seventy years after the Securities Act. Expecting consistency

across that long a period may simply be wishful thinking on Justice Scalia’s part.

A more fundamental criticism of Justice Scalia’s approach is that it ignores the reality of

securities class action practice. If the actual plaintiff must have “discover[ed] … the facts” to

begin the tolling of the statute of limitations, it is hardly a challenge for an enterprising

plaintiffs’ attorney to search out plaintiffs until he has found one who has not yet discovered

the facts. Scalia’s approach would render the Exchange Act’s statute of limitations a nullity for

securities class actions,48 leaving only the five‐year statute of repose. Even the plaintiffs did not

endorse Scalia’s approach. What is surprising is that Breyer did not call Scalia on this point.

Neither side of the dispute seems interested in – or perhaps aware of – the actual practice of

securities litigation.

47 Merck, 130 S. Ct. at 1798. 48 It would still play a role, however, in individual actions.


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The second question at issue in the case – what are the “facts constituting the violation”

– provoked no disagreement among the justices. The Court’s holding on this point – that

scienter is one of the facts constituting the violation49 – is unremarkable. Breyer’s discussion is

notable only in that it invokes the pleading standard from the PSLRA to help interpret the

statute of limitations.50 The PSLRA’s pleading standard requires that facts supporting scienter

be plead in the complaint. On this issue, Breyer harmonized the different amendments to the

Exchange Act, even though they were enacted by different Congresses. He saw no need,

however, to harmonize the Exchange Act’s statute of limitations with the one found in the

Securities Act. Statutory context apparently matters more within a particular statute than it

does across the securities laws as a whole.

C. Statutory Interpretation and the Securities Laws

One common thread running through these three cases is the predominance of

questions of statutory interpretation at the expense of how those statutes influence actual

practice. This approach suggests a somewhat confined vision of the judicial role; only certain

sources are relevant.

In Kircher and Merck, the approach to statutory interpretation was dominated by

judicial precedent. Congress was presumed to have incorporated those judicial interpretations

into its legislation. Whether any member of Congress was actually aware of that precedent, we

do not know.

In Dabit, the Court was faced with two interpretive strands, but the Court nonetheless

asserted that Congress was legislating against the backdrop of one strand rather than the other.

49 Merck, 130 S. Ct. at 1796. 50 Merck, 130 S. Ct. at 1796 (citing 15 U.S.C. § 78u‐4(b)(2)).


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The Court adopted the interpretive choice that it did because the purpose of the statute – to

prevent evasion of the PSLRA – was clear from the face of the statute. The judicial precedent

was of little relevance to the decision, but the Court nonetheless felt obliged to invoke it,

despite its lack of persuasive force.

The common thread here is that the Court is managing the relationship between itself

and Congress. In none of the three cases does the Court demonstrate any awareness – or

interest – in the actual practice of securities litigation. It is primarily interested in applying its

precedents in a predictable fashion. Whether it succeeds in this task is open to question, but

the enterprise is a general one, not securities law specific.

III. The Administrative State

During the New Deal, the securities laws were a critical proving ground for the Supreme

Court in developing its legal approach to the fledgling administrative state.51 Franklin Delano

Roosevelt and his administration faced a number of legal challenges to their efforts to tame the

financial markets. Most notable was a decade long war over the SEC’s efforts to dismantle the

giant public utility conglomerates under the authority granted by the Public Utility Holding

Company Act.52 The bottom line that emerged from those cases was that the Court was going

to defer to the administrative state; the expertise of the SEC was a bedrock belief among the

51 See Pritchard & Thompson, supra note 1, at . 52 Pub. L. No. 49 Stat. 803 (1935).


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New Deal alumni that Roosevelt appointed to the Supreme Court.53 That deference translated

into a stellar track record for the SEC; the agency rarely lost a case in its first four decades.54

The Roberts Court has been less deferential than the New Deal Court. It has decided

two cases implicating the role of the securities laws in the administrative state, and in both

cases, the Court rejected the government’s position. These results would suggest skepticism

toward the government’s arguments. When one probes beyond the results, however, the real

skepticism would appear to be toward the Court’s prior precedents. In these cases, the Roberts

Court appears to be grappling more with the case law that it has inherited from earlier Courts

rather than challenging the government’s expertise.

A. Antitrust v. Securities Regulation

The Supreme Court has struggled to reconcile the antitrust and securities laws. The

antitrust laws are premised on the benefits that free competition brings to the economy: lower

price, and greater choice, both of which are presumed to enhance consumer welfare. The

securities laws, like most regulatory schemes, create barriers to entry that invite

anticompetitive behavior. The SEC’s tolerance of price fixing of commissions by broker‐dealers

for the first forty years of its existence is the most notorious example.55

The Court has rarely waded into the conflict between these two regulatory regimes and

it has struggled when it has done so. The Court’s struggles can be traced to a bad start by the

Warren Court in Silver v. New York Stock Exchange.56 Silver was a broker‐dealer, not a member

53 See Pritchard & Thompson, supra note 1, at . 54 See E. Thomas Sullivan & Robert B. Thompson, The Supreme Court and Private Law: The Vanishing Importance of Securities and Antitrust, 53 Emory L.J. 1571, 1579–86 (2004) (describing the Supreme Court’s expansive holding in all but a handful of securities cases until 1973). 55 See Gordon v. New York Stock Exchange, 422 U.S. 659 (1975). 56 373 U.S. 341 (1963).


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of the New York Stock Exchange, who had his wire connection to a number of other broker‐

dealers terminated at the order of the New York Stock Exchange.57 Silver brought suit against

the exchange, alleging that the termination of his connection was a collective refusal to deal

that violated the Sherman Act. The Second Circuit held that the claim was barred because the

exchange was exercising powers it held under the Exchange Act, which had impliedly repealed

the antitrust laws with respect to those powers.58

The Supreme Court reversed, concluding that the Second Circuit had erred in excluding

the antitrust laws altogether: “the proper approach … is an analysis which reconciles the

operation of both statutory schemes with one another rather than holding one completely

ousted.”59 The Court then went on to reconcile the two schemes by turning to … due process?

The Court held that the antitrust laws had been violated because the exchange had not

afforded the broker‐dealer notice and hearing before terminating his wire connection. 60 The

Court’s injection of due process into antitrust was summarily dismantled by Justice Stewart in

his dissent,61 and has baffled both securities and antitrust lawyers since it was handed down.

The Court has not overruled Silver, but the Burger Court worked hard to narrow its

reach. In two cases decided the same day in 1975, the Court rejected antitrust claims against

participants in the securities industry. Notably, in both cases the United States and the SEC, as

amici, supported opposing sides. The first, United States v. National Association of Securities

57 Silver, 373 U.S. at 344. 58 302 F.2d 714 (1963). 59 Silver, 373 U.S at 357. 60 Silver, 373 U.S at 361‐362. 61 Silver, 373 U.S at 367, 370 (Stewart, J., dissenting) (“Whether there has been a violation of the antitrust laws depends not at all upon whether or not the defendants’ conduct was arbitrary.”).


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Dealers, (“NASD”) involved resale practices in the mutual fund industry.62 The second, Gordon

v. New York Stock Exchange, involved the fixed brokerage commissions mentioned above.63

In both cases, the Court concluded that the practices at issue were immune from

antitrust scrutiny, but only after painstaking review of the SEC’s involvement in the challenged

practice. In the NASD case, Justice Powell, writing for the Court, reviewed the SEC’s

involvement in mutual fund pricing under the Investment Company Act at length before

concluding “maintenance of an antitrust action for activities so directly related to the SEC’s

responsibilities poses a substantial danger that [the mutual fund managers] would be subject to

duplicative and inconsistent standards.”64 In Gordon Justice Blackmun conducted an equivalent

review of the SEC’s involvement in brokerage commissions before concluding that Congress

intended “to leave the supervision of the fixing of reasonable rates of commission to the SEC.”65

These decisions purported to leave intact Silver’s governing principle that “[r]epeal is to be

regarded as implied only if necessary to make Securities Exchange Act work, an even then only

to the minimum extent necessary.”66 Silver survived because the Court concluded that the

minimum repeal “necessary” was quite.

The Court’s unwillingness to overrule Silver left the door open for the claim in Credit

Suisse Securities (USA) LLC v. Billing.67 This case arose out of the “laddering” scandals of 2001‐

2002, in which it was alleged that underwriters, in exchange for allocations of shares in “hot”

initial public offerings, extracted promises from institutional investors to purchase securities in

62 422 U.S. 694 (1975). 63 422 U.S. 659 (1975). 64 NASD, 422 U.S. at 735. 65 Gordon, 422 U.S. at 691. 66 Silver, 373 U.S. at 357. 67 551 U.S. 264 (2007).


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the secondary market at inflated prices and/or with inflated commissions.68 The twist in Credit

Suisse was that at least some of the conduct alleged, if proven, violated the securities laws as

well as the antitrust laws.69 In fact, a parallel securities class action was brought, alleging

essentially the same facts, resulting in a substantial settlement.70 The plaintiffs in Credit Suisse

reasoned that if the conduct violated both the antitrust and the securities laws, then there was

no inconsistency between the two regimes, making no repeal of the antitrust laws necessary..

As in Gordon and NASD, the Justice Department’s Antitrust Division and the SEC were on

opposing sides in the lower courts. In those earlier cases, the Solicitor General authorized the

SEC to file its own brief in the Supreme Court. In Credit Suisse, however, the Solicitor General

attempted to cobble together a compromise position when the case reached the Supreme

Court. He argued the case should be remanded to the district court to determine “whether

respondents' allegations of prohibited conduct can, as a practical matter, be separated from

conduct that is permitted by the regulatory scheme.”71 That task would require the lower court

to decide whether SEC‐permitted and SEC‐prohibited conduct are “inextricably intertwined.”

Justice Breyer, writing for the Court, rejected both the plaintiffs’ and Solicitor General’s

arguments. He discerned “only a fine, complex, detailed line separate[ing] activity that the SEC

permits or encourages (for which [plaintiffs] must concede antitrust immunity) from activity

that the SEC must (and inevitably will) forbid (and which, on [plaintiffs’] theory, should be open

to antitrust attack.)”72 The Court worried that only a “securities expert” could locate this line,

68 Credit Suisse, 551 U.S. at 269‐270. 69 Credit Suisse, 551 U.S. at 278‐279. 70 In re IPO Litigation, Stipulation and Agreement of Settlement (Civ. Action NO. 21 MC 92 (SAS); (Oct. 5, 2009 S.D.N.Y.) (approving $586 million settlement). 71 Credit Suisse, 551 U.S. at 284 (quoting Brief for United States as Amicus Curiae 9). 72 Credit Suisse, 551 U.S. at 279.


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and even then, the SEC might shift it by deciding that previously forbidden conduct was now

permissible.73 Moreover, Breyer worried that “nuanced nature of the evidentiary evaluations

necessary to separate the permissible from the impermissible” would lead to inconsistent

verdicts in the hands of “different nonexpert judges and different nonexpert juries.”74 The

unpredictability of such an arrangement for market participants is obvious. Rather than

disrupting the scheme of securities regulation, the Court concluded that antitrust claims should

be excluded in their entirety. Silver is not explicitly overruled in Credit Suisse, but Credit Suisse

clearly steps back from Silver’s inventive effort to preserve a role for the antitrust laws. In

Credit Suisse Breyer leaves little doubt that Silver need not be taken seriously. Securities

regulation is sufficiently pervasive that antitrust claims ordinarily will be barred.

Justice Thomas dissented, pointing to the savings clause found in the Exchange Act,

which preserves “any and all” “rights and remedies.”75 For Thomas, “[w]hen Congress wants to

preserve all other remedies, using the word ‘all’ is sufficient.”76 If adopted, Thomas’s position

would open the door to a myriad of antitrust claims challenging practices sanctioned by the

securities laws. Literalism of this sort was put forward by Scalia in Merck and also rejected by

the majority. The results in Credit Suisse and Merck suggest that textualism has a limited

following on the Court.

The general theme of the majority opinion in Credit Suisse is judicial modesty; the Court

lacks confidence in the ability of judges to understand the complexity of the securities markets.

This judicial modesty, however, does not translate in judicial deference to the executive branch.

73 Credit Suisse, 551 U.S. at 280. 74 Credit Suisse, 551 U.S. at 281. 75 Securities Exchange Act § 28(a); 15 U.S.C. 78bb(a). 76 Credit Suisse, 551 U.S. at 287, 289 (Thomas, J., dissenting).


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The Court was unimpressed with the Solicitor General’s effort at compromise; his “inextricably

intertwined” principle failed to address the line‐drawing difficulties that the Court had found.

The Court was unwilling to defer to the government’s effort to push it (and lower courts) into

resolving complicated disputes over competing regulatory paradigms.

B. Separation of Powers

The Roberts’ Court other foray into the intersection of administrative law and securities

law – Free Enterprise Fund v. Public Company Accounting Oversight Board77 (“PCAOB”) – is

notable for two reasons. The first is that it is the only opinion of the nine securities law cases

authored by the Chief Justice. The second is that it has almost nothing to do with the securities

laws: Neither the majority nor the dissenters grapples with the decision’s implications for the

regulation of accounting.

PCAOB nominally involves the Sarbanes‐Oxley Act, but it is mainly a constitutional

separation of powers case. At issue was the provision of that law making PCAOB board

members removable only by the SEC, and then only “for good cause shown.”78 This provision

was challenged as inconsistent with separation of powers doctrine because it deprived the

President of meaningful oversight over officers exercising executive authority. The Chief Justice,

for the majority, wrote a lengthy opinion surveying the Court’s prior decisions involving “for

cause” restrictions, which were upheld by the New Deal Court in Humphrey’s Executor.79 The

tenor of his discussion of those prior precedents is at best grudging, but he eventually comes to

the conclusion that some restrictions on the President’s removal authority are permissible. The

77 130 S. Ct. 3138 (2010). 78 15 U.S.C. § 7211(e)(6). A second issue was raised in the case regarding the appointment of the PCAOB members by the SEC, but the Court rejected the argument summarily. See PCAOB, 130 S. Ct. at 79 Humphrey’s Executor v. United States, 295 U.S. 602 (1935).


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double “for cause” removal provision at issue in PCAOB, however, was too much.80 In a

similarly lengthy opinion (with Appendix!), Justice Breyer, joined by Justices Stevens, Ginsburg,

and Sotomayor, concluded that it was not.81

For the average securities lawyer, the only thing of interest in the opinions is that the

Court found that the unconstitutional “for cause” provision was severable from the remainder

of the Sarbanes‐Oxley Act. 82 The question of severability was the only topic that created any

drama; the Court’s holding meant that the decision was largely a non‐event for the practice of

securities law because the Sarbanes‐Oxley Act was left generally intact. Whether the members

of the PCAOB are removable or not is not likely to make much of a difference for the day‐to‐day

practice of accounting regulation.

For the scholar of securities law, the opinion is notable both for what it includes and

what it omits. The notable inclusion is the Court’s assumption that the members of the SEC are

removable only for cause, despite the lack of a textual basis for that conclusion.83 As Justice

Breyer points out in his dissent, the majority stretches to create a constitutional question by

reading a for cause provision for the removal of SEC Commissioners into the Exchange Act.84 If

the Court had instead read the Exchange Act to allow for at will removal of SEC Commissioners

80 PCAOB, 130 S. Ct. at 3164 (“While we have sustained in certain cases limits on the President's removal power, the Act before us imposes a new type of restriction‐two levels of protection from removal for those who nonetheless exercise significant executive power. Congress cannot limit the President's authority in this way.”). 81 PCAOB, 130 S. Ct. at 3184 (Breyer, J., dissenting) (“in my view, the Court’s decision is wrong—very wrong.”). 82 PCAOB, 130 S. Ct. at 3161‐3162. 83 PCAOB, 130 S. Ct. at 3148‐3149 (“The parties agree that the Commissioners cannot themselves be removed by the President except under the Humphrey's Executor standard of “inefficiency, neglect of duty, or malfeasance in office,” 295 U.S., at 620, (internal quotation marks omitted); see Brief for Petitioners 31; Brief for United States 43; Brief for Respondent Public Company Accounting Oversight Board 31 (hereinafter PCAOB Brief); Tr. of Oral Arg. 47, and we decide the case with that understanding.”). 84 PCAOB, 130 S. Ct. at 3182‐3183 (Breyer, J., dissenting).


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by the President, the novel constitutional question of double for cause removal could have

been avoided.85

Why did the Court depart from its usual practice of construing statutes to avoid

constitutional questions? If one reads the majority’s opinion, the most reasonable conclusion

to draw from the arguments offered there is that restrictions on the President’s power to

remove the SEC commissioners violate the separation of powers. The holding, however, targets

the new kid in town, the PCAOB. The SEC’s status in the pantheon of regulatory agencies is

apparently so secure that it is unthinkable for the Court to question its independence from the

executive, notwithstanding the absence of a textual basis in the Exchange Act for a “for cause”

provision.

The notable omission from the opinion is any discussion of Congress’s goals in insulating

the members of the PCAOB from removal. The omission is telling. Congress was not likely

concerned about presidential interference with the Board’s operations; rather, the real threat

was from Congress itself. Politics abhors a vacuum of governmental authority. By insulating

the SEC from the President’s removal authority, Congress made the SEC not independent, but

rather, dependent on Congress.86 That dependence allowed Congress to strongarm the SEC on

the question of auditor independence.87 When Arthur Andersen collapsed in the wake of the

Enron scandal, the auditing firm’s substantial revenue stream from consulting for Enron was

diagnosed as the principal cause. Faced with a flurry of embarrassing headlines, Congress

quickly got religion on the question of auditor independence. That newfound fervor found its

85 PCAOB, 130 S. Ct. at 3184 (Breyer, J., dissenting). 86 I delve into this point in The SEC at 70: Time for Retirement? 80 Notre Dame L. Rev. 1073 (2005) 87 Interview with Arthur Levitt, Frontline (March 12, 2002), transcript available at http://www.pbs.org/wgbh/pages/frontline/shows/regulation/interviews/levitt.html.


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expression in the independence conferred on the PCAOB, which was insulated both from the

President and Congress in the hope that it would protect accounting regulation from political

interference. None of this history is covered in the Court’s opinion, which blinks reality by

asserting “that one branch's handicap is another's strength.”88 This point applies to the “for

cause” removal requirement for the SEC, but has much less force when applied to the PCAOB.

Moreover, the dissent fails to challenge the majority on its skewed understanding of the

balance of power between Congress and the President. This omission by both sides of any

discussion of the rationale for the PCAOB’s independence might be taken as further evidence of

the gap between the Court’s securities jurisprudence and the political economy of securities

regulation. In fairness to the Court, however, it is difficult to sound judicial while discussing

interest group pressures on Congress and their influence on accounting policy. Do the justices

really want to introduce the question of campaign contributions into separation of powers

jurisprudence? That said, the Court’s decision restores some of the influence that Congress

previously held over the accounting profession. Any benefit to Presidential oversight from the

Court’s striking down the PCAOB’s “for cause” provision seems de minimis by comparison.

C. Securities Laws and the Administrative State

Credit Suisse and PCAOB reflect efforts by the Roberts Court to limit the effect of prior

precedents that it considers misguided. In Credit Suisse, it is the Warren Court’s confused Silver

decision, which conflates antitrust and due process. In PCAOB, it is the New Deal Court’s

decision in Humphrey’s Executor, animated by the belief in the need to insulate expert agencies

from political interference. Both lines of precedent have implications that go well beyond the

88 PCAOB, 130 S. Ct. at 3156.


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administration of the securities laws. The opinions in Credit Suisse and PCAOB are directed at

those debates, paying scant attention to the substance of the securities laws.

IV. The Class Action Menace?

The Roberts Court has decided substantive issues in four securities class actions during

the Chief Justice’s first five years. On the nominal scorecard, plaintiffs have won one of those

cases, and the defendants the other three. A closer look at those decisions, however, suggests

more balance; informed observers would put the tally closer to two and two.89 Plaintiffs have

been rebuffed when they attempted to expand the boundaries of private litigation, but the

Roberts Court has also overturned lower court decisions that would have curtailed the existing

availability of securities class actions.

A. The Pleading Standard

Tellabs, Inc. v. Makor Issues & Rights, Ltd.90 is one of the Supreme Court’s first efforts to

grapple with the PSLRA. The decision interprets the PSLRA’s “strong inference” standard for

pleading scienter—the defendants’ state of mind—in Rule 10b‐5 cases.91 After the enactment

of the PSLRA, the different circuits took divergent approaches in applying the strong inference

standard. The Second Circuit relied on the legislative history and held that the PSLRA codified

its pre‐PSLRA pleading approach based on motive and opportunity and on recklessness.92 The

89 If one were to include Dabit (defendant win) and Merck (plaintiff win) in this tally, the numbers would change to three to three. 90 551 U.S. 308 (2007). 91 Exchange Act § 21D(b)(2). 92 Novak v. Kasaks, 216 F.3d 300, 311 (2000). The PSLRA’s strong inference scienter provision was modeled after the standard applied in the Second Circuit prior to the PSLRA, which was generally regarded as the most stringent at the time. See S. Rep. No. 104‐98, at 15 (1993), reprinted in 1995‐96 U.S.C.C.A.N. 679, 694. Prior to the PSLRA, the Second Circuit had held that plaintiffs could meet the scienter standard in one of two ways. First, plaintiffs


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Ninth Circuit also relied on the PSLRA’s legislative history, but concluded that the statute raised

the standard above that of the Second Circuit.93 Under the higher Ninth Circuit pleading

standard, plaintiffs had to plead, “at a minimum, particular facts giving rise to a strong

inference of deliberate or conscious recklessness.”94 Most circuits, however, took a middle

course in interpreting the strong inference standard, concluding that motive and opportunity

allegations might suffice to support a strong inference of scienter, but courts would need to

evaluate such allegations on a “case‐by‐case” basis.95

could plead that the defendants had the motive to commit fraud and the opportunity to do so. Goldman v. Belden, 754 F.2d 1059 (2d Cir. 1985). Although simplistic allegations of motive that could apply generally, such as keeping one’s job, see In re Crystal Brands Sec. Litig., 862 F. Supp. 745, 749 (D. Conn. 1994), were insufficient to meet the standard, other allegations of specific financial gain from a transaction were sufficient to state a claim—such as evidence of abnormal levels of insider trading. See Goldman v. Belden, 754 F.2d 1059, 1070 (2d Cir. 1985) (holding that allegations that defendants bullish statements to market were connected to significant stock sales met motive and opportunity test). Second, plaintiffs could meet the standard with circumstantial evidence of either recklessness or conscious behavior. See San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Co., 75 F.3d 801 (2d Cir. 1996) (requiring plaintiffs seeking to meet recklessness standard to provide higher level of detail than that required under motive and opportunity test). Generally, this standard required plaintiffs to plead contemporaneous facts, conditions, or statements to show that the defendants knew or should have known that the alleged misstatement was misleading when made. See Shields v. Citytrust Bancorp, 25 F.3d 1124, 1129 (2d. Cir. 1994) (rejecting allegations of fraud where plaintiffs failed to contrast public disclosure with contemporaneous internal document or data).

The Second Circuit has refined its explication of its scienter standard post‐PSLRA. Now, rather than a two‐prong test, the Second Circuit has set forth a list of the general types of allegations that will meet the heightened pleading standard for scienter. Synthesizing its own case law on the pleading standard, the Second Circuit held that plaintiffs can plead a strong inference of fraudulent intent by including sufficient allegations that the defendants: received concrete, personal benefits from the alleged fraud; participated in deliberately illegal behavior; knew or had access to facts “suggesting” that the public statements were inaccurate; or “failed to check information they had a duty to monitor.” See id. at 311. This refined standard, of course, still leaves room for pleading based on motive and opportunity. 93 See In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 974 (9th Cir. 1999). 94 Id. 95 Greebel v. FTP Software, Inc., 194 F.3d 185 (1st Cir. 1999); Ottman v. Hanger Orthopedic Group, Inc. 353 F.3d 338 (4th Cir. 2003); Nathenson v. Zonagen, Inc., 267 F.3d 400 (5th Cir. 2001); In re Comshare, Inc. Sec. Litig., 183 F.3d 542 (6th Cir. 1999); Makor Issues & Rights, Ltd. v. Tellabs, Inc., 437 F.3d 588 (7th Cir. 2006); Fla. State Bd. of Admin v. GreenTree Fin. Corp., 270 F.3d 645 (8th Cir. 2001); In re Silicon Graphics, 183 F.3d 970 (9th Cir. 1999); City of Philadelphia v. Fleming Cos., 264 F.3d 1245 (10th Cir. 2001); Bryant v. Avado Brands, Inc., 187 F.3d 1271 (11th Cir. 1999). The choice of scienter standard has important consequences: the Ninth Circuit, in adopting the most stringent standard post‐PSLRA, also substantially increased its dismissal rate. An earlier study found that Ninth Circuit courts dismissed cases at a 63% rate, while Second Circuit courts dismissed only 36%. See A.C. Pritchard & Hillary Sale,


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When the Supreme Court finally entered the fray over the interpretation of the strong

inference standard in Tellabs, it did not resolve this longstanding split among the circuits over

the application of the standard, which most observers had been expecting. Instead, it

addressed a collateral, but related, issue on which the circuits also had split: In considering

whether the facts alleged by the plaintiff meet the strong inference standard, how should

courts assess the allegations in the complaint and the different possible inferences that might

be drawn from those allegations with respect to scienter? In particular, should a court

consider competing inferences arising from those facts?

Prior to the Supreme Court’s Tellabs opinion, the circuit courts split into three groups in

assessing competing inferences. The First, Fourth, Sixth, and Ninth Circuits adopted a

“preponderance” standard.96 The preponderance standard requires the inference that the

defendants had the requisite scienter be the most plausible when compared with competing

inferences that the defendants did not have scienter. Combined with the Ninth Circuit’s higher

deliberate or conscious recklessness scienter standard, this standard made it easier for

defendants to obtain dismissal in the Ninth Circuit. The Second, Eighth, Tenth, and Eleventh

Circuits required that the inference that the defendants acted with the requisite scienter must

be at least equally plausible with competing inferences.97 Finally, the Third and Seventh Circuits

followed the most plaintiff‐friendly approach, adopting the “reasonableness” standard that did

What Counts As Fraud? An Empirical Study of Motions to dismiss Under the Private Securities Litigation Reform Act, 2 J. Emp. Leg. Stud. 125 (2005). 96 In re Credit Suiss First Boston Corp., 431 F.3d 36 (1st Cir. 2005); Ottman v. Hanger Orthopedic Group, Inc., 353 F.3d 338 (4th Cir. 2003); Helwig v. Vencor, Inc., 251 F.3d 540 (6th Cir. 2001); Gompper v. VISX, Inc., 298 F.3d 893 (9th Cir. 2002). 97 Acito v. IMCERA Group, Inc., 47 F.3d 47 (2d Cir. 1995); Rosenzweig v. Azurix Corp., 332 F.3d 854 (5th Cir. 2003); Fla. State Bd. Of Admin v. Gree Tree Fin. Corp., 270 F.3d 645 (8th Cir. 2001); Pirraglia v. Novell, Inc., 339 F.3d 1182 (10th Cir. 2003); Garfield v. NDC Health Corp., 466 F.3d 1255 (11th Cir. 2006).


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not require any assessment of competing inferences, looking only at the plausibility of the

plaintiff’s allegations.98 Under the Seventh Circuit’s reasonableness standard as set forth in

Makor Issues & Rights, Ltd. v. Tellabs, Inc. (the lower court opinion before the Supreme Court in

Tellabs), a complaint should survive “if it alleges facts from which, if true, a reasonable person

could infer that the defendant acted with the required intent.”99

The Seventh Circuit standard faced an uphill fight in the Supreme Court. The

government’s amicus brief in Tellabs argues that the Seventh Circuit’s reasonableness standard

would have made Congress’s effort in enacting the PSLRA scienter standard toothless, as it

would mean reverting to pre‐PSLRA standards under Rule 9(b) of the Federal Rules of Civil

Procedure.100 The government’s brief is notable in that it sides with the defendants, an unusual

occurrence in its amicus practice.101 The SEC has historically sided with the plaintiffs’ bar,102

and even minor deviations from that role bring a firestorm of criticism from the plaintiffs’ bar

and its allies.103 The SEC’s support for the plaintiffs’ bar in part reflects its own institutional

interests. The agency favors broad interpretations of its governing statutes; a narrow

interpretation of § 10(b) could reduce the SEC’s enforcement discretion, but the agency

commonly sides with the plaintiffs’ bar even on issues that relate purely to the terms of the

98 In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256 (3rd Cir. 2006). 99437 F.3d 588, (7th Cir. 2006). 100 Brief for the United States as Amicus Curiae Supporting Petitioners, Tellabs, Inc. v. Makor Issues & Rights, Ltd., No. 06‐484, 2007 WL 460606, at *23 (arguing that “the court of appeals’ standard appears to be equivalent to the standard that it (and some other courts of appeals) had applied before the enactment of the Reform Act, under which a complaint was sufficient if the plaintiff pleaded facts that supported at least a reasonable inference of state of mind.”). 101 See id. at *26 (arguing that “if the alleged facts give rise to two seemingly equally strong competing inferences, a court must conclude that the inference of scienter is not itself strong.”) (citations and quotation marks omitted). 102 See Pritchard, supra note at 923 (quoting Lewis Powell complaining that “SEC usually favors all π. I can’t recall a case in which this was not so.”). 103 See, e.g., Stephen Labaton, S.E.C. Seeks to Curtail Investor Suits, N.Y. Times, Feb. 13, 2007, at C1; Stephen Labaton, Is the S.E.C. Changing Course? N.Y. Times, March 1, 2007, at C1. Labaton is the son of a prominent plaintiffs’ lawyer, Ed Labaton.


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implied Rule 10b‐5 cause of action. So here the Court faced the unusual scenario of the

government siding with the defendants.

The Court was unmoved by this unusual alignment in interpreting the PSLRA’s “strong

inference” language. Ginsberg characterized her role as framing “a workable construction of

the ‘strong inference’ standard, a reading geared to the PSLRA's twin goals: to curb frivolous,

lawyer‐driven litigation, while preserving investors' ability to recover on meritorious claims.”104

Having framed the inquiry in this way, it is no surprise that Ginsberg settled on the intermediate

position. She rejected the reasonableness standard adopted by the lower court, instead

requiring a comparative inquiry: “A complaint will survive, we hold, only if a reasonable person

would deem the inference of scienter cogent and at least as compelling as any opposing

inference one could draw from the facts alleged.”105 That conclusion was compelled by

Congress’s use of the word “strong.” According to Ginsberg, “[t]he strength of an inference

cannot be decided in a vacuum. The inquiry is inherently comparative: How likely is it that one

conclusion, as compared to others, follows from the underlying facts?”106 At a minimum,

therefore, the Court felt compelled to choose the intermediate “equal inference” standard,

rejecting the “reasonableness” standard. Ties go to the plaintiff, but the plaintiff, as the master

of the complaint, must show that the inference of fraudulent intent is at least as likely as an

innocent one.

In so doing, the Court also rejected the “preponderance” standard favored by the

defendants and the government, as well as garnering the support of Justices Scalia and Alito in

104 Tellabs, 551 U.S. at 322. 105 Tellabs, 551 U.S. at 324. 106 Tellabs, 551 U.S. at 323.


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their concurrences.107 Scalia gets points for his colorful illustration of his disagreement with

Ginsberg:

If a jade falcon were stolen from a room to which only A and B had access, could it possibly be said there was a “strong inference” that B was the thief? I think not, and I therefore think that the Court's test must fail. In my view, the test should be whether the inference of scienter (if any) is more plausible than the inference of innocence.108

This provoked the predictable exchange between Scalia and Ginsberg over the analogy, and

more fundamentally, the “meaning” of the word strong.109 Scalia also engaged in a familiar

debate with both the majority and Stevens (who dissented) over the appropriate approach to

statutory interpretation generally, complete with the standard Scalia complaint about the use

of legislative history.110 Scalia was particularly provoked by Stevens’ free‐wheeling approach to

statutory interpretation. For Scalia, such discretion is “conferred upon administrative agencies,

which need not adopt what courts would consider the interpretation most faithful to the text of

the statute, but may choose some other interpretation, so long as it is within the bounds of the

reasonable.”111 Courts “must apply judgment, to be sure. But judgment is not discretion.”112

Stevens shot back that “[t]he meaning of a statute can only be determined on a case‐by‐

case basis and will, in each case, turn differently on the clarity of the statutory language, its

context, and the intent of its drafters.113 Stevens preferred a “probable cause” standard

because “it is a concept that is familiar to judges” and “[a]s a matter of normal English usage, its

107 Tellabs, 551 U.S. at 329 (Scalia, J., concurring); 551 U.S. at 331 (Alito, J., concurring). 108 Tellabs, 551 U.S. at 329 (Scalia, J., concurring). 109 Tellabs, 551 U.S. at 331‐332 (Scalia, J., concurring). 110 Tellabs, 551 U.S. at 329 (Scalia, J., concurring) (“Even if I agreed with the Court's interpretation of “strong inference,” I would not join the Court's opinion because of its frequent indulgence in the last remaining legal fiction of the West: that the report of a single committee of a single House expresses the will of Congress.”). 111 Tellabs, 551 U.S. at 332 (Scalia, J., concurring). 112 Id. 113 Tellabs, 551 U.S. at 335, 336 n.1 (Stevens, J., dissenting).


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meaning is roughly the same as ‘strong inference’.”114 It is unclear who normally uses

“probable cause” at all, other than criminal defense lawyers and prosecutors. Stevens,

however, made no pretense that this is what Congress intended in adopting the “strong

inference” phrasing. Suffice to say, none of the participants in this intramural debate

persuaded the others.

In fairness to the justices, it is not altogether clear that much of anything was at stake

once the implausible “reasonableness” standard was rejected. Is there much difference

between the equal inference and preponderance standards? In theory, the two differ only

when the competing inferences are tied. The equal inference standard awards ties to the

plaintiffs, leading to a rejection of the defendants’ motion to dismiss on scienter grounds; the

preponderance standard awards ties to the defendants, leading to a dismissal. As Justice Scalia

noted in his concurrence, the difference between the equal inference and preponderance

standards is likely to be determinative in only a small fraction of cases: “How often is it that

inferences are precisely in equipoise?”115

Given the limited change to the law effected by Tellabs in most circuits, would it make

any difference to outcomes? It turns out that it does. Steve Choi and I, in a study comparing

motions to dismiss based on the pleading standard before and after Tellabs, found that

dismissals declined sharply in the Ninth Circuit after the decision, and that the incidence of

nuisance settlements climbed in that circuit.116 The justices were debating amongst themselves

114 Tellabs, 551 U.S. at 336 (Stevens, J., dissenting). 115 Tellabs, 551 U.S. at 331 (Scalia, J., concurring). 116 See Stephen J. Choi & A.C. Pritchard, The Supreme Court’s Impact on Securities Class Actions: An Empirical Assessment of Tellabs, (Working Paper, 2010).


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the proper approach to statutory interpretation; their somewhat academic debate had real

consequences for litigants. That observation, however, is one made only in hindsight.

B. Mutual Fund Litigation

A less prominent feature of the Court’s securities jurisprudence is the regulation of

mutual funds under the Investment Company Act of 1940.117 Jones v. Harris Associates LP118

came to the Court from the Seventh Circuit. The dispute over the case in the Seventh Circuit is

probably the most interesting aspect of the case. The plaintiffs’ claim in Jones was that the

investment adviser to the mutual fund in question collected excessive fees for its management

services, thereby breaching its “fiduciary duty with respect to the receipt of compensation for

services.”119 The district court granted summary judgment to the defendant, applying the

multifactor analysis first adopted by the Second Circuit in Gartenberg v. Merrill Lynch Asset

Management, Inc.120 Judge Frank Easterbrook wrote the decision for the Seventh Circuit

affirming the grant of summary judgment, but he departed drastically from the rationale

applied by the lower court.121 In Easterbrook’s view, the fiduciary duty standard of the

Investment Company Act was a limited one: “A fiduciary must make full disclosure and play no

tricks but is not subject to a cap on compensation.”122 Easterbrook’s support for this narrow

definition of fiduciary duty: the forces of competition, driven by sophisticated investors,

imposed substantial pressure to keep advisory fees low, so judicial scrutiny would add little.123

The free market ethos underlying this argument brought a rebuke from, of all people, Judge

117 54 Stat. 789, 15 U.S.C. § 80a‐1 et seq. 118 130 S. Ct. 1418 (2010). 119 15 U.S.C. § 80a‐35(b). 120 694 F.2d 923 (2nd Cir. 1982) 121 527 F.3d 627 (2008). 122 527 F.3d at 632. 123 527 F.3d at 633‐634.


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Richard Posner, who critiqued Easterbrook’s “economic analysis” as being “ripe for

reexamination.”124 Posner’s faith in markets has apparently been shaken by the late financial

crisis.125

Easterbrook’s aggressive position created a conflict with other circuits, necessitating

Supreme Court review, but his position got little support there. Both the defendant and the

government declined to endorse it, instead endorsing the Gartenberg standard.126 The Court

declined to take a position on the Easterbrook/Posner debate: “The debate between the

Seventh Circuit panel and the dissent from the denial of rehearing regarding today's mutual

fund market is a matter for Congress, not the courts.”127 Instead, the Supreme Court fell into

line with the overwhelming weight of lower court authority, endorsing the Gartenberg standard

as a matter of statutory interpretation.

Justice Alito, writing for the Court, said that Congress meant to adopt the Court’s

standard from Pepper v. Litton: “The essence of the test is whether or not under all the

circumstances the transaction carries the earmarks of an arm’s length bargain.”128 Oddly, Alito

offers no reason at all for this conclusion.129 It appears to be the correct interpretation of the

statute because it is the Court’s general interpretation of fiduciary duty. If Congress wants to

deviate from the judicial standard, it will have to be clear about it. Pepper is the standard that

the justices know.

124 537 F.3d 728, 730 (Posner, J., dissenting from the denial of rehearing en banc). 125 Richard A. Posner, The Crisis of Capitalism (2010); Richard A. Posner, A Failure of Capitalism: The Crisis of '08 and the Descent into Depression (2009). 126 Jones, 130 S. Ct. at 1425. 127 Jones, 130 S. Ct. at 1430‐1431. 128 Jones, 130 S. Ct. at 1427 (quoting Pepper v. Litton, 308 U.S. 295 (1939); emphasis supplied by Jones Court). 129 Jones, 130 S. Ct. at 1427 (“We believe that this formulation expresses the meaning of the phrase ‘fiduciary duty’ in § 36(b) [of the Investment Company Act]”).


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The Court’s endorsement of the Gartenberg standard appears grudging at best. Alito

emphasized courts should be cautious in making comparisons between fees charged to mutual

funds and institutional investors.130 He also noted that courts must defer to “the judgment of

disinterested directors apprised of all relevant information” absent “additional evidence that

the fee exceeds the arm's‐length range.”131 Alito closes with a caution that sounds much like

the business judgment rule: “In reviewing compensation under § 36(b), the Act does not

require courts to engage in a precise calculation of fees representative of arm's‐length

bargaining. … Congress' approach recognizes that courts are not well suited to make such

precise calculations.”132 The Court rejected the Seventh Circuit’s interpretation that would

have largely neutered the Investment Company Act’s fiduciary duty standard, but its

interpretation of the Gartenberg standard is so narrow that plaintiffs face huge obstacles to

actually winning their claims.133

C. Scheme Liability

130 Jones, 130 S. Ct. at 1429 (“Even if the services provided and fees charged to an independent fund are relevant, courts should be mindful that the Act does not necessarily ensure fee parity between mutual funds and institutional clients contrary to petitioners' contentions.”) . 131 Jones, 130 S. Ct. at 1430. 132 Jones, 130 S. Ct. at 1430 (citations omitted). 133 Justice Thomas, concurring, would have gone still further in distancing the Court from judicial ratemaking:

I concur in the Court's decision to affirm this approach based upon the Investment Company Act's text and our longstanding fiduciary duty precedents. But I would not say that in doing so we endorse the “Gartenberg standard.” Whatever else might be said about today's decision, it does not countenance the free‐ranging judicial “fairness” review of fees that Gartenberg could be read to authorize, see 694 F.2d, at 929‐930, and that virtually all courts deciding § 36(b) cases since Gartenberg (including the Court of Appeals in this case) have wisely eschewed in the post Gartenberg precedents we approve.

Jones, 130 S. Ct. at 1431 (Thomas, J., concurring).


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Stoneridge Investment Partners, LLC v. Scientific‐Atlanta, Inc.134 is easily the most

controversial of the Roberts Court’s securities law decisions, provoking a (failed) attempt at a

legislative override. Appropriately, the decision is a sequel to the Rehnquist Court’s most

controversial effort to curtail securities class actions – Central Bank of Denver v. First Interstate

Bank of Denver135 – which provoked a partial legislative override of its own. Central Bank, like

Stoneridge, was written by Justice Anthony Kennedy, and brief summary is needed to set the

stage for Stoneridge. The issue presented in Central Bank was whether private civil liability

under § 10(b) (the authorizing statute for Rule 10b‐5) extends to aiders and abettors of the

violation. The open ended nature of aiding and abetting liability worried Kennedy. In Central

Bank, he warned that uncertainty over the scope of liability could induce secondary actors to

settle “to avoid the expense and risk of going to trial.”136 The risk of having to pay such

settlements could cause professionals, such as accountants, to avoid newer and smaller

companies, and “the increased costs incurred by professionals because of the litigation and

settlement costs under 10b‐5 may be passed on to their client companies, and in turn incurred

by the company’s investors, the intended beneficiaries of the statute.”137

In an effort to increase Rule 10b‐5’s predictability, Kennedy’s opinion adopted a two‐

part framework for addressing the scope of the private right of action under § 10(b). In the first

step of the inquiry, Kennedy examined the text of § 10(b) to determine the scope of the

conduct prohibited by the provision. He had little difficulty determining that the text of § 10(b)

“prohibits only the making of a material misstatement (or omission) or the commission of a

134 552 U.S. 148 (2008). 135 511 U.S. 164 (1994). 136 Central Bank, 511 U.S. at 189. 137 Id.


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manipulative act.”138 This settled the question for Kennedy: aiding and abetting was not

prohibited by § 10(b).

Nonetheless, Kennedy set forth a second‐step to the inquiry:

When the text of § 10(b) does not resolve a particular issue, we attempt to infer how the 1934 Congress would have addressed the issue had the 10b‐5 action been included as an express provision in the 1934 Act. For that inquiry, we use the express causes of action in the securities Acts as the primary model for the § 10(b) action. The reason is evident: Had the 73d Congress enacted a private § 10(b) right of action, it likely would have designed it in a manner similar to the other private rights of action in the securities Acts ... .139

The plaintiffs’ argument also failed under this second step, because the explicit causes of action

afforded by Congress in the Securities Act and the Exchange Act were similarly silent on the

question of aiding and abetting. Whether the question is resolved under the first or the second

step of this inquiry has potentially significant consequences. When the Court interprets § 10(b),

it is defining not only the limits of the private cause of action, but also the reach of the SEC’s

authority. When it constructs the hypothetical cause of action in the second step, only the

private cause of action is implicated.

In passing, Kennedy noted one additional problem with the plaintiffs’ argument, which

would have important consequences in Stoneridge: “Were we to allow the aiding and abetting

action proposed in this case, the defendant could be liable without any showing that the

plaintiff relied upon the aider and abettor's statements or actions.”140 The Court left the door

138 Central Bank, 511 U.S. at 177. 139 Id. at 178 (citations and internal quotation marks omitted). The Court has used the approach of looking to express causes of action to infer appropriate elements under the implied cause of action under Rule 10b‐5 in other cases. Lampf, Pleva, Lipkind, Purpis & Petigrow v. Gilbertson, 501 U.S. 350 (1991) (applying statute of limitations from Securities Act claims to Rule 10b‐5 claim); Musick, Peeler & Garrett v. Employers Ins. of Wausau, 508 U.S. 286, 297 (1993) (finding an implied right of contribution under Rule 10b‐5 based on express right of contribution under explicit causes of action in the Exchange Act). 140 Central Bank, 511 U.S. at 180.


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open for some liability for secondary participants, such as accountants, investment bankers,

and lawyers, but only if they have exposed themselves to that risk by acting in a way that

induces investor reliance. The bottom line after Central Bank is that a defendant must make a

misstatement (or omission) on which a purchaser or seller of a security relies. Kennedy did not

explain further the connection between reliance and the scope of Rule 10b‐5; that issue would

reemerge in Stoneridge.

The scope of a primary violation of Rule 10b‐5 came back to the Court in Stoneridge.

The Stoneridge plaintiffs attempted an end run around Central Bank: instead of alleging that

the secondary defendants had made or participated in the making of a misstatement, the

plaintiffs alleged that the secondary defendants were part of a “scheme to defraud,” thus

invoking a separate provision in Rule 10b‐5.141

The scheme alleged by the plaintiffs in Stoneridge involved two suppliers of the cable

company Charter Communications. The plaintiffs’ complaint alleged that Charter committed a

massive accounting fraud inflating its reported operating revenues and cash flow. The plaintiffs

also named as defendants two equipment suppliers who provided cable set‐top boxes to

Charter, Scientific‐Atlanta and Motorola. The plaintiffs alleged that Charter paid the suppliers

$20 extra for each set‐top box in return for the supplier’s agreement to make additional

payments back to Charter in the form of advertising fees. Charter then capitalized the $20

extra expense (shifting the accounting cost into the future) while treating the advertising fees

as current income, artificially boosting Charter’s current accounting revenues at the expense of

future income. The suppliers had no direct role in preparing or disseminating the fraudulent

141 Exchange Act Rule 10b‐5(a).


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accounting information, nor did they approve Charter’s financial statements. The plaintiffs

alleged, however, that the vendors facilitated Charter’s deceptions by preparing false

documentation and backdating contracts. The district court granted the suppliers’ motion to

dismiss, relying on Central Bank to hold that the vendors were not primary violators under Rule

10b‐5. The court of appeals affirmed, concluding that the suppliers had not engaged in any

deception because they had made no misstatements, had no duty to disclose to Charter’s

investors, and had not manipulated Charter’s shares.142

As noted above, the SEC has consistently supported the expansion of private securities

class actions.143 So, too, in Stoneridge, with the majority of the commissioners voting to file a

brief siding with the plaintiffs.144 The agency was overruled, however, by the Solicitor General,

who sided with the defendants.145 Here, the government’s argument was essentially adopted

in toto by the Court, so we have deference to the government, but not to the SEC.

The Supreme Court, by a vote of 5‐3 (with Justice Breyer recused), affirmed. Justice

Kennedy, writing for the Court, rejected the appellate court’s holding that there was no

142 In re Charter Communications, Inc. Sec. Litig., 443 F.3d 987, 990‐93 (8th Cir. 2006). 143 Brief of the Securities and Exchange Commission, Amicus Curiae, In re Worldcom Securities Litigation, 2nd Cir. 03‐9350, available at http://www.sec.gov/litigation/briefs/wchevesi_amicus.htm#summaflowry (last visited July 3, 3008) (noting SEC’s support for FOTM presumption in Basic v. Levinson, and arguing for application of presumption to reports by securities analysts). See also Donald C. Langevoort, Basic at Twenty: Rethinking Fraud on the Market, 2009 Wisc. L. Rev. 151, 157 (2009) (“[T]he Basic opinion was for all practical purposes drafted by the SEC and the Office of the Solicitor General. Most all of the key arguments, analysis, quotes and citations that one finds in the Courts’ holdings on both materiality and reliance come directly out of the amicus curiae brief filed on behalf of the SEC.”). 144 The vote was 3‐2. See Paul Atkins, Just Say ‘No” to the Trial Lawyers, Wall St. J., Oct. 9, 2007, at A17. Chairman Christopher Cox voted with the majority, despite having introduced the bill that in 1995 that would have reversed Basic. Joel Seligman, The Transformation of Wall Street 663‐64 (3d Ed. 2003). The SEC had filed a brief in a Ninth Circuit case raising similar issues arguing that ““[t]he reliance requirement is satisfied where a plaintiff relies on a material deception flowing from a defendant's deceptive act, even though the conduct of other participants in the fraudulent scheme may have been a subsequent link in the causal chain leading to the plaintiff's securities transaction.” SEC Reply Br. at 12, Simpson v. AOL Time Warner, Inc., No. 04‐55665 (Feb. 7, 2005) <http://www.sec.gov/litigation/briefs/homestore_020405.pdf> (last visited July 3, 2008). 145 Brief for the United States as Amicus Curiae Supporting Affirmance (August 15, 2007).


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deception, noting that “[c]onduct itself can be deceptive.”146 He instead hung the affirmance

on the other doctrinal point from his Central Bank decision, the incompatibility of aiding and

abetting liability with the “essential element” of reliance.147 He concluded that the

presumptions of reliance from Affiliated Ute and Basic did not apply because the suppliers had

no fiduciary duty to Charter’s shareholders and the suppliers’ statements were not

disseminated to the public. In this case, investors relied on Charter for its financial statements,

not the cable set‐top box transactions underlying those financial statements.148 Why did

Kennedy focus on defendants’ conduct, rather than the plaintiffs, when assessing reliance?

According to Kennedy, “reliance is tied to causation, leading to the inquiry whether [suppliers’]

acts were immediate or remote to the injury.”149 Kennedy was treating the reliance inquiry as a

species of the tort concept of proximate cause.

As in Central Bank, Kennedy’s principal concern was the specter of unlimited liability.

According to Kennedy, “[w]ere this concept of reliance to be adopted, the implied cause of

action would reach the whole marketplace in which the issuing company does business.”150 If

accepted, the plaintiff’s theory threatened to inject the § 10(b) cause of action into “the realm

of ordinary business operations.”151

Kennedy’s rationale for limiting the concept of reliance could have more naturally been

put into the “in connection with the purchase or sale of any security” language from § 10(b).

Kennedy pointed to that language, but said that it did not control in this case because the “in

146 Stoneridge, 558 U.S. at 158. 147 Id. 148 Id. (citing Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128 (1972); Basic, Inc. v. Levenson, 485 U.S. 224 (1988). 149 Stoneridge, 558 U.S.at 160. 150 Stoneridge, 558 U.S. at 160. 151 Stoneridge, 558 U.S. at 161.


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connection with” requirement goes to the “statute’s coverage rather than causation.”152

Another reason for not putting the limit into that doctrinal category is that the Court had only

recently affirmed a very broad scope for that requirement.153 A more substantial reason is that

cabining Rule 10b‐5 through the “in connection with the purchase or sale” requirement would

limit not only private plaintiffs, but potentially, the SEC, whose enforcement authority is limited

by the reach of the statute. Kennedy conceded that the SEC’s enforcement authority might

reach commercial transactions like those between Charter and its suppliers, but he was

reluctant to grant the same freedom to the plaintiffs’ bar.154

Given the need to cabin the plaintiffs’ bar, but maintain the SEC’s discretion, the

reliance requirement was an attractive tool. The reliance requirement, despite being an

“essential element,” does not flow the language of § 10(b), but is instead derived from the

common law of deceit.155 More importantly for Kennedy’s purposes, reliance does not apply in

enforcement actions brought by the SEC or criminal prosecutions brought by the Justice

Department.156 Putting the limit on secondary party liability in the reliance element allowed

the Court to have its cake – unfettered government enforcement – and eat it too – constrain

the scope of private actions.

The importance of the SEC’s enforcement efforts had been reinforced by Congress’s

response to Central Bank. Rebuffing calls to restore aiding‐and‐abetting liability, Congress

152 Stoneridge, 558 U.S. at 160. 153 See Merrill Lynch, Pierce, Fenner & Smith v. Dabit, 547 U.S. 71 (2006); SEC v. Zandford, 535 U.S. 813 (2002). 154 Stoneridge, 552 U.S. at 161 (“Were the implied cause of action to be extended to the practices described here … there would be a risk that the federal power would be used to invite litigation beyond the immediate sphere of securities litigation and in areas already governed by functioning and effective state‐law guarantees.”). 155 See, e.g., List v. Fashion Park, Inc. 340 F.2d 457 (2d Cir. 1965). 156 Geman v. SEC, 334 F.3d 1183, 1191 (10th Cir. 2003) (“The SEC is not required to prove reliance or injury in enforcement cases.”); United States v. Haddy, 134 F.3d 542, 549‐51 (3d Cir. 1998) (government need not prove reliance in criminal case).


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instead gave that authority only to the SEC.157 Accepting the plaintiff’s argument in Stoneridge,

Kennedy reasoned, would thus “undermine Congress’ determination that this class of

defendants should be pursued by the SEC and not by private litigants.”158 Kennedy’s rationale

for the need to constrain private litigants echoed and amplified the policy concerns he

expressed in Central Bank. Expanding liability would undermine the US’s international

competitiveness and raise the cost of capital because companies would be reluctant to do

business with American issuers. Issuers might list their shares elsewhere to avoid these

burdens.159

Looking at the question of reliance, it is difficult to extract any consistent guiding

principle from the Court’s decisions. Justice Stevens, dissenting in Stoneridge (as he had in

Central Bank), hammered on this point:

Basic is surely a sufficient response to the argument that a complaint alleging that deceptive acts which had a material effect on the price of a listed stock should be dismissed because the plaintiffs were not subjectively aware of the deception at the time of the securities’ purchase or sale. This Court has not held that investors must be aware of the specific deceptive act which violates § 10(b) to demonstrate reliance. …

The fraud‐on‐the‐market presumption helps investors who cannot demonstrate that they, themselves, relied on fraud that reached the market. But that presumption says nothing about causation from the other side: what an individual or corporation must do in order to have “caused” the misleading information that reached the market. The Court thus has it backwards when it first addresses the fraud‐on‐the‐market presumption, rather than the causation required.160

157 PSLRA § 104, 109 Stat. 757 (codified at 15 U.S.C. § 78t(e)). Congress recently expanded the SEC’s authority by reducing the state of mind requirement from knowledge to recklessness. See Dobb‐Frank. 158 Stoneridge, 552 U.S. at 163. 159 Id. at 163‐164. 160 Stoneridge, 552 U.S. at 170‐171(Stevens, J., dissenting).


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It is fair to say that Justice Blackmun, who wrote Affiliated Ute and Basic, would have reached a

different outcome in Stoneridge. As Blackmun noted in his memo to the file after reviewing the

Affiliated Ute briefs, “I feel we should plump for a high standard in this area, and that this is in

line with the intent of Congress in enacting the legislation.”161 Blackmun set a “high standard”

in Affiliated Ute and Basic; Kennedy ratcheted it down in Central Bank, and again in Stoneridge.

Stevens pushed, unsuccessfully, to further Blackmun’s legacy in expanding the private cause of

action under Rule 10b‐5.162

The point is not that one side or the other is correct in their divining of congressional

intent. That quest seems futile. Rule 10b‐5’s reliance element is nowhere to be found in the

language of § 10(b) or Rule 10b‐5; the Court borrowed it from the common law of deceit.

Despite that borrowing, the Court does not refer to the common law when it is interpreting the

reliance requirement for the Rule 10b‐5 private cause of action. In Stoneridge, Kennedy

brusquely rejected the argument that the plaintiffs had adequately pled reliance under

common law standards: “Even if the assumption is correct, it is not controlling. Section 10(b)

does not incorporate common‐law fraud into federal law.”163 It would seem more accurate to

say that the incorporation is selective: The Court borrows the common law element of reliance,

without really explaining why, but then disregards it when inconvenient. Kennedy’s rejection of

common law standards in Stoneridge suggests that the Court is charting its own common law

course. The Court’s interventions, however, are episodic; the Court takes an insufficient

161 Harry A. Blackmun, Memo, No. 70‐78 – Affiliated Ute Citizens v. United States (10/18/71), Harry A. Blackmun Papers, Library of Congress. 162 Stoneridge, 552 U.S. at 175‐176 (Stevens, J., dissenting) (“A theme that underlies the Court’s analysis is its mistaken hostility towards the § 10(b) private cause of action. The Court’s current view of implied causes of actions is that they are merely a relic of our prior heady days.”) (citations and internal quotation marks omitted). 163 Stoneridge, 552 U.S. at 162.


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number of securities cases to develop this “common law” in any meaningful manner. Will the

larger number of cases heard by the Roberts Court change this? Given the framing of the

debates in these cases, it seems unlikely.

The two‐part interpretive approach framed by Kennedy in Central Bank purports to

depart from the common law interpretation that typified Rule 10b‐5 for many years. Cases like

Affiliated Ute and Basic focused on assuring recovery for the plaintiffs, with little regard for the

costs created by private litigation. Generally, the Court used a common law, policy‐oriented

approach when it was expanding Rule 10b‐5, viewing the private cause of action as an

“essential supplement” to the SEC’s enforcement efforts.164 Central Bank promised a textual,

formalist approach when the Court turned to reining in the reach of the private cause of action.

Stoneridge, with its return to a fuzzy “requisite causal connection” notion of reliance,165 fails to

deliver on that promise, instead returning to an essentially common law mode of

decisionmaking. The opinion does little more than tell us that the defendants’ conduct was

“too remote” for plaintiffs to rely on.166 The bottom line is that both factions of the Court

manipulate the reliance element to achieve their preferred scope for the securities fraud cause

of action. More recently, the faction resisting expansion has prevailed.

D. Foreign Class Actions

The Roberts Court’s most recent foray into securities class action practice involved the

extra‐territorial reach of the federal securities laws. Morrison v. National Australia Bank Ltd.

164 Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S. Ct. 2499, 2504 (2007). 165 Stoneridge, 552 U.S. at 159 (quoting Basic, 485 U.S. at 243). 166 Stoneridge, 552 U.S. at 161.


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was a so‐called “F‐cubed” securities class action: Australian investors who had purchased

common shares of the largest Australian bank over the Australian Stock Exchange.

The district court dismissed the case for lack of subject matter jurisdiction and the

Second Circuit affirmed.167 The Second Circuit had developed a two‐prong test to determine

whether the application of the U.S. securities laws was appropriate. Jurisdiction to adjudicate a

§ 10(b) claim would exist if the plaintiff could show either: (1) an effect of American securities

markets or investors; or (2) significant conduct relating to the fraud taking place in the United

States.168 The National Australia plaintiffs disclaimed reliance on the effects prong because the

American investor who purchased National Australia’s ADRs on the New York Stock Exchange

was dismissed from the litigation at an early stage.169 The conduct at issue was the inflation of

the value of assets of Homeside, a wholly‐owned subsidiary of National Australia operating a

mortgage servicing business out of Florida. The plaintiffs alleged that Homeside had

exaggerated the value of its mortgage servicing contracts and that these exaggerated figures

were passed through to National Australia’s consolidated balance sheet, thereby causing

National Australia’s stock to trade at an inflated value.170 When National Australia eventually

wrote down the value of Homeside’s assets, the price of National Australia’s stock plummeted

and the plaintiffs filed suit.171 The Second Circuit, however, said that the federal courts lacked

167 2006 WL 3844465 (S.D.N.Y. 2006) and 547 F.3d 167 (2nd Cir. 2008), respectively. 168 SEC v. Berger, 322 F.3d 187, 192‐193 (2nd Cir. 2003). 169 In re National Australia Bank Securities Litigation, No. 03 Civ. 6537(BSJ), 2006 WL 3844465, *9 (S.D.N.Y., Oct.25, 2006). 170 National Australia, 130 S. Ct. at 2875‐2876. 171 National Australia, 130 S. Ct. at 2876.


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jurisdiction over the Australian investors’ claims because conduct in Australia was the source of

the alleged misrepresentations.172

The plaintiffs filed a petition for certiorari, and the Supreme Court asked for the Solicitor

General’s views. In the government’s amicus brief, the Solicitor General argued that the

Second Circuit had erred in treating the question as jurisdictional, rather than relating to the

merits.173 Turning to the merits, the government argued that the Second Circuit was at once

too restrictive and too generous in conferring jurisdiction over § 10(b) claims. Too restrictive,

because the Second Circuit had held that private plaintiffs and the SEC should be held to the

same standard; the government argued that it should be held to a lower standard.174 Perhaps

taking their cue from Stoneridge, the government urged that the correct standard for

enforcement and criminal actions was what it characterized as the full reach of § 10(b): “a

transnational securities fraud violates Section 10(b) when the fraud involves significant conduct

in the United States that is material to the fraud’s success.”175 For private plaintiffs, additional

restrictions were in order; specifically, a private plaintiff should be required to “establish not

simply that his loss resulted from the fraudulent scheme as a whole, but that the loss resulted

directly from the component of the fraud that occurred in the United States.”176

172 Morrison v. National Australia Bank, 547 F.3d 167, 176 (2nd Cir. 2008) (“NAB, not HomeSide, is the publicly traded company, and its executives‐assisted by lawyers, accountants, and bankers‐take primary responsibility for the corporation's public filings, for its relations with investors, and for its statements to the outside world.”). 173 Brief for the United States as Amicus Curiae Supporting Respondents, Morrison v. National Australia Bank Ltd., Docket # 08‐8‐1191, at 9‐13. 174 Brief for the United States as Amicus Curiae Supporting Respondents, Morrison v. National Australia Bank Ltd., Docket # 08‐8‐1191, at 30 (criticizing holding of SEC v. Berger, 322 F.3d 187 (2nd Cir. 2003) that same jurisdictional standard applies to private plaintiffs and SEC). 175 Brief for the United States as Amicus Curiae Supporting Respondents, Morrison v. National Australia Bank Ltd., Docket # 08‐8‐1191, at 16. 176 Brief for the United States as Amicus Curiae Supporting Respondents, Morrison v. National Australia Bank Ltd., Docket # 08‐8‐1191, at 26.


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The SEC’s efforts to throw the plaintiffs under the bus were to no avail. The Court

rejected not only the plaintiffs’ claim, but also the government’s argument that private actions

should be held to a higher standard. Justice Scalia wrote for the majority; he was clearly a jurist

on a mission. After summarily dispatching the Second Circuit’s “threshold error” in treating the

question as jurisdictional,177 Scalia turned to dismantling the Second Circuit’s conduct and

effects test. The Second Circuit, noting the silence of § 10(b) on extraterritorial effect, had

taken it upon itself to divine what Congress would have done if it had thought about the

question. What would this hypothetical Congress do? (1) Protect American investors; and (2)

Discourage fraudsters from operating out of the United States. Notwithstanding the plausibility

of these goals, Scalia argued that the Second Circuit’s test was wrong from its inception. The

Second Circuit’s test failed to accord due weight to the Court’s longstanding presumption

against giving statutes extra‐territorial effect: “When a statute gives no clear indication of an

extraterritorial application, it has none.”178 The Second Circuit had gone off the tracks when it

had inferred from § 10(b)’s silence on the question of extra‐territorial application an invitation

to engage in “judicial‐speculation‐made‐law‐divining what Congress would have wanted if it

had thought of the situation before the court.”179 That judicial speculation was bad enough,

but it had led to “unpredictable and inconsistent application of § 10(b) to transnational

cases.”180 From Scalia’s perspective, “[t]here is no more damning indictment of the ‘conduct’

and ‘effects’ tests than the Second Circuit's own declaration that ‘the presence or absence of

any single factor which was considered significant in other cases ... is not necessarily dispositive

177 National Australia, 130 S. Ct. at 2876‐2877. 178 National Australia, 130 S. Ct. at 2878. 179 National Australia, 130 S. Ct. at 2881. 180 National Australia, 130 S. Ct. at 2880 (citing numerous commentators).


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in future cases.’”181 Judicially created out of whole cloth, and unpredictable to boot? A recipe

for a Scalia tirade on the proper role of judges. The Solicitor General’s somewhat cosmetic

repackaging of that test fared no better.182 Nor was the SEC’s endorsement of that test entitled

to deference, as it was premised on the judicial errors committed by the Second Circuit.183

And what does Scalia see as the proper role of judges? Reading statutes for their

ordinary meaning. Having debunked the Second Circuit’s approach, Scalia was forced to devise

his own rule of decision. Unsurprisingly, he argued that his preferred test was grounded the

text of the statute. Examining the text of § 10(b), Scalia found that the focus was not on

deception, but rather, the provision’s requirement that deception, to be actionable, must be “in

connection with the purchase or sale of securities.”184 The purchase or sale transaction, Scalia

thought, was the touchstone of what Congress sought to regulate, and purchasers and sellers

were the parties that Congress sought to protect. This analysis of § 10(b)’s text led Scalia to his

test for its application: “transactions in securities listed on domestic exchanges, and domestic

transactions in other securities.”185 Scalia’s conclusion derived from the statutory text was

bolstered by the structure of the statute,186 as well as “the probability of incompatibility with

the applicable laws of other countries.”187 On this point, the Court appears to have been

swayed by the amicus briefs filed by a number of foreign governments, who protested

181 National Australia, 130 S. Ct. at 2879 (quoting IIT v. Cornfeld, 619 F.2d 909, 918 (1980). 182 National Australia, 130 S. Ct. at 2886. 183 National Australia, 130 S. Ct. at 2887‐2888 (“Since the Commission's interpretations relied on cases we disapprove, which ignored or discarded the presumption against extraterritoriality, we owe them no deference.”). 184 National Australia, 130 S. Ct. at 2884. 185 National Australia, 130 S. Ct. at 2884. 186 National Australia, 130 S. Ct. at 2885 (parsing § 30(a) & (b) of the Exchange Act, which provide for limited extr‐territorial effect). 187 National Australia, 130 S. Ct. at 2885.


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vigorously the exposure of companies headquartered in their jurisdictions to American class

actions.188

This last point bears examining. When the Second Circuit was developing its conduct

and effects test, the United States was the only game in town for securities class actions, so the

Second Circuit’s imperialism was not directly stepping on the toes of any foreign government.

Many countries object, however, to the exposure of their companies to our class action regime,

a point noted by Justice Scalia.189 Most countries remain skeptical of the utility of the class

action as an enforcement device. A handful, however, most notably Australia and Canada,

recently have adopted securities class action regimes of their own.190 The conflict becomes

more acute when those companies are also subject to class action suit in their home

jurisdictions. The threat of overdeterrence posed by double liability is obvious.

On the opposite end of the spectrum was Justice Stevens’ concurrence. Continuing his

lonely defense of the Rule 10b‐5 private cause of action, Stevens embraced the Second Circuit’s

conduct and effects test, and more generally, the judiciary’s role in creating the §10(b) cause of

action.

The development of § 10(b) law was hardly an instance of judicial usurpation. Congress invited an expansive role for judicial elaboration when it crafted such an open‐ended statute in 1934. And both Congress and the Commission

188 National Australia, 130 S. Ct. at 2885‐2886 (citing briefs filed by Australia, Great Britain, and France). 189 National Australia, 130 S. Ct. at 2886 (“While there is no reason to believe that the United States has become the Barbary Coast for those perpetrating frauds on foreign securities markets, some fear that it has become the Shangri‐La of class‐action litigation for lawyers representing those allegedly cheated in foreign securities markets.”) 190 See Ashley Black and Kathleen Harris, “Corporate Class Actions in Australia,” Mallesons Stephen Jacques, June 2006 (available at www.mallesons.com/publications). On Canada, see A.C. Pritchard & Janis P. Sarra, Securities Class Actions Move North: A Doctrinal and Empirical Analysis of Securities Class Actions in Canada , 47 Alberta L. Rev. 881 (2010).


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subsequently affirmed that role when they left intact the relevant statutory and regulatory language, respectively, throughout all the years that followed.191

As usual, Stevens gave considerable weight to the fact the Second Circuit test was long‐

standing.192 More pointedly, while agreeing with the Court’s conclusion, he reiterated his

lament from Stoneridge, dissenting from “from the Court's continuing campaign to render the

private cause of action under § 10(b) toothless.”193

The National Australia decision produced an immediate, if somewhat clumsy, reaction

from Congress. Less than a month after the decision was handed down, Congress passed the

Dodd‐Frank Wall Street Reform and Consumer Protection Act, a wholesale reform of financial

regulation in the wake of the recent financial crisis. Among its reforms was one aimed at

overruling the result in National Australia, as the bill’s legislative history makes clear: ““This

bill’s provisions concerning extraterritoriality ... are intended to rebut [National Australia]’s

presumption by clearly indicating that Congress intends extraterritorial application in cases

brought by the SEC or the Justice Department.”194 Unfortunately, Congress enacted language

ensuring only that the courts would have jurisdiction to hear cases with extraterritorial

application, not that § 10(b) would have extraterritorial application.195 Thus, Congress repeated

the Second Circuit’s error of treating the scope of the law as jurisdictional, rather than a merits

question. Even if the courts ignore the provision’s language and apply the provision to expand

the substantive scope of § 10(b), it applies only to actions brought by the SEC or the Justice

191 National Australia, 130 S. Ct. at 2890 (Stevens, J. concurring). 192 National Australia, 130 S. Ct. at 2895 (Stevens, J. concurring) (criticizing the majority for paying ”short shrift … to the accumulated wisdom and experience of the lower courts.”). 193 National Australia, 130 S. Ct. at 2895 (Stevens, J. concurring) (quoting Stoneridge, 552 U.S., at 175, (Stevens J., dissenting)). 194 Remarks of Congressman Kanjorski, Cong. Record H5237 (June 30, 2010). 195 H.R. 4173, 111th Cong., § 929P(b) (2010).


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Department. (Private plaintiffs won only a study by the SEC, which is required to report to

Congress within eighteen months of the Dodd‐Frank passage.)196 Congress’s reaction is rather

humorous in light of Justice Scalia’s claim that one benefit of a clear presumption against

extraterritorial application is that it “preserv[es] a stable background against which Congress

can legislate with predictable effects.”197 The “predictable effects” that Justice Scalia claims for

his rule are premised on an assumption of minimal competence on the part of Congress. That

assumption proved unjustified in this case; it does not appear that anyone on Capitol Hill

bothered to read Justice Scalia’s opinion. We will have to wait to see if courts follow Dodd‐

Frank’s legislative history or its text when it comes to interpreting the extraterritorial provision.

E. Anti‐Plaintiff Court?

At the time that Roberts was nominated to be the Chief Justice, there were claims that

he would head a “pro business” Court. The decisions of Roberts Court, however, if anything

show a bias toward the status quo. Tellabs and Jones both rebuffed efforts by lower courts to

narrow the gates through which securities class actions could proceed. A fair‐minded

scorekeeper would have to put these decisions in the plaintiff’s column, despite the

defendant’s nominal victory in Tellabs. In Tellabs, the Supreme Court reversed a lenient

Seventh Circuit decision for drawing inferences with respect to scienter, but replaced it with a

standard that is nonetheless relatively generous to plaintiffs. In so doing, the Court rejected a

more stringent standard adopted by a number of lower courts and urged by both the

governments as amicus and the dissenting justices. On balance, the Tellabs decision was likely

a net benefit to the plaintiffs’ bar. Both Tellabs and Jones are cautious decisions, grounded in

196 H.R. 4173, 111th Cong., § 929Y(2010). 197 National Australia, 130 S. Ct. at 2881.


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conventional approaches to statutory interpretation. Stoneridge and National Australia, by

contrast adopt considerably more aggressive language. Both decisions rebuffed efforts by the

plaintiffs’ bar to expand the pool of potential defendants; Stoneridge to third party defendants,

National Australia to foreign companies. The perceived disregard of Supreme Court precedents

by lower courts in these areas were calculated to provoke hot button responses from individual

justices. In Stoneridge, it was Justice Kennedy, who likely saw “scheme liability” as an attempt

to do an end run around the holding of his Central Bank opinion. In National Australia, Justice

Scalia was provoked by the Second Circuit’s disregard for the Court’s presumption against

extraterritorial application. Accordingly, it should come as no surprise that the rhetoric in

Stoneridge and National Australia takes on a more muscular tone. These decisions reflect the

Roberts Court bringing the lower courts to heel. It is reaction to the lower courts’

waywardness, rather than any agenda peculiar to the securities laws, that drives the more

strident tenor of those decisions.

V. Conclusion

The Roberts Court’s work in the field of securities law demonstrates what happens

when a court of general jurisdiction is charged with making decisions in an area with which it is

unfamiliar. Analysis of the Court’s decisions yields few, if any, common threads tying them

together as a body of work. Whatever direction the securities laws take in the Supreme Court,

do not expect opinions to grapple more seriously with the interplay between securities law and

the securities markets anytime soon. The randomness of the Roberts Court’s securities

jurisprudence results in part from the stream of cases that make their way on to the Court’s


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docket. It is also a product, however, of the absence of any individual justice having an interest

in the field. A comparison with Lewis Powell’s tenure on the Court illustrates the point. Powell

drew on his background as a corporate lawyer to push the Court in a particular direction during

his time on the Court, reining in securities class actions and imposing a common law framework

on the SEC’s vendetta against insider trading.198

The Roberts Court does not have a figure like Powell in the field of securities law. It

agrees to hear securities cases because there is a circuit split, not because it is anxious to

impose its mark on the field of securities law. The debate that engages the justices in these

cases do not come from the field of securities laws, but rather, are more general: statutory

interpretation, the use of legislative history, the presumption against the extraterritorial

application of legislation, etc.

What does this indifference mean for securities law? First, it may mean that the path of

law is somewhat unpredictable. It is hard to know when a Justice will be so galvanized by a

particular issue that he takes ownership of it, as Justice Kennedy appears to have done with

aiding and abetting. Second, absent such an issue, there is likely to be a presumption in favor

of the position taken by the government. This attitude of occasional deference means that the

relationship between the SEC and the Solicitor General takes on critical importance. If the SEC

can persuade the Solicitor General, its position is likely to prevail in the Roberts Court. With a

Democrat currently in the White House, the SEC and the Solicitor General are likely to see eye‐

to‐eye in the near term. If the Republicans regain control of the White House, that could

198 See Pritchard, supra note .


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change, but for now, the government is likely to take positions that maximize the SEC’s reach as

it did in National Australia (albeit unsuccessfully).

No justice is likely to push securities law in a more aggressive direction than the SEC; the

retirement of Justice Stevens means that there is no one left on the Court with any pretensions

of being an activist in the field, particularly in the area of the private right of action. Justice

Ginsberg, writing for the Tellabs majority, made it clear that the Court intends to defer to

Congress in this area: “It is the federal lawmaker's prerogative … to allow, disallow, or shape

the contours of ‐ including the pleading and proof requirements for ‐ § 10(b) private actions.”199

This language suggests we should not expect the Court to be anything more than a passive

observer here; major changes, if any, will come from Congress.

The Roberts Court’s cautious attitude is a departure for the Court. The Court’s

treatment of the basic question of the existence of the implied private right of action in

Stoneridge sends a clear signal that the Court’s expansionist days are over in the field of

securities law. Kennedy made it clear that the initial implication of a private cause of action had

been a mistake; under current doctrine, private causes of action are based only on explicit

instruction from Congress.200 Having recognized the mistake, the Court was not going to

compound the error: “Concerns with the judicial creation of a private cause of action caution

against its expansion. The decision to extend the cause of action is for Congress, not for us.

Though it remains the law, the § 10(b) private right should not be extended beyond its present

199 Tellabs, 551 U.S. at 327. 200 Id. (“Though the rule once may have been otherwise, it is settled that there is an implied cause of action only if the underlying statute can be interpreted to disclose the intent to create one.”) (citations omitted).


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boundaries.”201 Thus, Stoneridge stands for the proposition that the Rule 10b‐5 cause of action

is now frozen, at least when it comes to the expansion of liability by the Court.202 Expansion of

the cause of action will have to come from Congress, if it is to come at all. This attitude of

deference is a far cry from the heady days of the Warren Court, or even Justice Blackmon’s

expansionist push in Basic, Inc. v. Levinson. Securities law in the Roberts Court is likely to be

focused on maintaining the status quo.

201 Id. at 773. 202 See id. (“when [the aiding and abetting provision of the PSLRA] was enacted, Congress accepted the § 10(b) private cause of action as then defined but chose to extend it no further.”).

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